The 1% Move Report

Wealth Management — February 1, 2021

• US stocks traded higher on Monday as the S&P 500 rose 1.6% to close at 3,774. With the rally, the index is back to positive on the year to date, up 0.5%.
• US equities started the first week of February on a strong note, with the S&P 500 gaining 1.6%. Monday's rally comes after last week's 3.3% loss for the index, the biggest weekly loss since October 2020. As was the case with last week's sell-off, there was no single catalyst to point to for Monday's reversal higher. Against the backdrop of higher volatility, markets will have much to digest this week between a host of economic data releases, 4Q corporate earnings reports, virus/vaccine updates and ongoing stimulus negotiations in Washington D.C.
• All 11 S&P 500 sectors finished the session higher, with Consumer Discretionary (+2.8%) and Information Technology (+2.5%) outperforming the broader market, while Health Care (+0.3%) and Consumer Staples (+0.0%) lagged the broader market.
• Rates were little changed across the curve, with the 10-year Treasury yield closing at 1.07% as of the 4 p.m. equity market close. Gold was up 0.8%, while WTI oil was higher, at nearly $54 per barrel. The US dollar strengthened modestly in the trading session, as measured by the US Dollar Index.

US stocks rose on Monday, as the S&P 500 gained 1.6%. The S&P 500, which recorded its worst weekly loss since October last week by losing 3.3%, rebounded strongly Monday to start the first trading day of February. After futures traded more than 1% lower overnight, equity markets posted a sharp reversal throughout the session that ended with the S&P 500 recording its biggest gain since November 24. No single catalyst could be pinpointed for the rebound in equity markets today, but all 11 S&P 500 sectors did end higher, with mega-cap growth stocks leading on the session. While last week markets were focused on the surge in highly shorted stocks, which could have led to some money managers scaling down their equity market exposure, Monday's rally perhaps was aided by more normalizing volatility as many of those same highly shorted stocks underperformed on the session, and the CBOE Volatility Index (VIX) fell back below 30. Fundamentals also will be in focus this week as 4Q earnings season continues and a host of economic data releases are on the docket, including Friday's January non-farm payrolls report.

Record and unprecedented stimulus from both the Fed and Congress has unleashed a V-shaped recovery in global trade, manufacturing, goods retailing, and housing. That momentum, coupled with the resolution of the US Presidential election and much better-than-expected initial trial outcomes for COVID-19 vaccines, has lifted equity markets to new all-time highs. Although investors are correct to be concerned about index level valuations, which have reached multi-decade extremes at more than 22x forward earnings, the economic and profit dynamics in 2021 could support another 5%-10% gain to 3,900 for the S&P 500. Another round of fiscal stimulus, continuing Fed accommodation, and swelling pent-up demand for consumer services, may also support economic growth acceleration to 5%-6% real GDP, with inflation rebounding to more than 2%, a scenario that should support 27% year-over-year profit gains. However, optimal navigation of this burgeoning new business cycle will require care as Treasury rates are likely to move higher, creating a headwind for long-duration assets. In stocks, our preferences remain focused on quality and valuation support, attributes that remain in small caps, international stocks and cyclicals, including financials, which should benefit from the steeper yield curve. Dollar weakness is likely to continue as policy choices are debasing and relative growth outside the US becomes more compelling, supporting the case for emerging markets and commodities. In fixed income, the challenge is two-fold: Generating sufficient income, while also preserving capital, requires a diversified and active exposure, with our preference toward a mix of corporate credit (IG and HY), preferreds, leveraged loans, asset-backed securities, including select mortgage-backed, and dividend-paying stocks. Capital preservation and portfolio hedging from equity volatility may be achieved with a combination of cash and ultra-short duration instruments, and absolute return hedge funds. Real assets like gold, infrastructure and real estate for inflation support should be bought opportunistically.

Market data provided by Bloomberg.

Dow Jones Industrial Average (DJIA): A price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.

NASDAQ Composite Index: A broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market.

S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.

US Trade-Weighted Dollar Index: A weighted average of the foreign exchange value of the US dollar against a subset of the broad index currencies that circulate widely outside the US.

VIX: This is a trademarked ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 Index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market’s expectation of stock market volatility over the next 30-day period.